February 27, 2020
If you’re a company director in Australia, and you’re having financial difficulty in your business and your company’s affairs, you may be considering working with registered liquidators to liquidate your company.
But when you wind up a company and creditors deal with the liquidator of your company, do you have to declare bankruptcy? Will liquidation cause you to lose your home or cause you to incur any other personal debts? In this blog from Insolvency Experts, we’ll answer these questions and many more. Let’s get started now.
Note: This post is for informative purposes only. Consult appropriate legal counsel before considering insolvency or corporate liquidation.
First, let’s discuss a common misconception that company directors get confused about when they decide to declare that their company is insolvent. Personal bankruptcy is for individuals. If you cannot pay your debts – your personal debts – you may need to file for bankruptcy.
In contrast, liquidation is for companies, and is used when the company is in too much debt to continue operating. It’s for corporate debts – not personal debts.
These two processes are largely unrelated. Because of this, you will not automatically go bankrupt when you decide to liquidate an insolvent company. In fact, it can be that you will not incur any significant personal losses at all when you liquidate a company. Let’s discuss this subject in more detail now.
Even as the director of a company, you are legally distinct from your company. Even if your company is not able to pay its debts from its own resources, you, other directors, and shareholders are not required to pay for those debts personally.
Instead, your company alone is responsible for paying these debts. Even if your company does not have enough money to repay all the debts it has, these will not fall to you – they stay with your company. There are some exceptions, though, which we’ll discuss now.
There are some circumstances where, if you are a company director, you may be personally responsible for certain business debts incurred by your company. Here are a few examples of exceptions that could lead to personal debt – and even bankruptcy – for company directors.
Essentially, this means that the lender will have a direct claim on you and therefore your personal assets – you will have to pay the debt, or negotiate an appropriate settlement or you may be forced into bankruptcy. That’s why it is risky to take accounts or loans for a company with personal guarantees attached.
If you are found guilty of insolvent trading, you may be held personally liable to repay creditors, which can lead to loss of your assets or even bankruptcy.
If you take these steps and your company still becomes insolvent, you are less likely to be held liable for its debts. But if it can be proved that you did not adequately perform your duties as a director, you may lose personal assets through claims for insolvent trading and other such issues.
As long as you have not performed illegal or unethical activities, are paid up on your taxes and superannuation, and have not signed any loans with personal guarantees, you likely will not need to worry unduly about your personal assets being taken during the liquidation process.
Liquidation is one of the three common types of insolvency for companies in Australia. The options you have for declaring insolvency include liquidation or voluntary administration. A Deed of Company Arrangement (DOCA) may also be used in a successful voluntary administration.
Of these options, liquidation is typically the most straightforward process for declaring insolvency, and wrapping up a business’s operations. Let’s discuss the basics of the liquidation process now.
If the directors and shareholders choose not to appoint a liquidator, a creditor may petition the court to wind up a company with a winding up application. This legal action will result in a court appointed liquidator of the company.
The duties of the liquidator are to wind up the affairs of the company, develop an understanding of the assets & property of the company, distribute assets among creditors, and investigate and report to the ASIC the circumstances of the company’s insolvency.
Legal action may be taken against the director(s) – In cases (such as those mentioned above) where a company director’s actions has contributed to the failure of a company, legal action or penalties may be levied against the company director.
This is just a basic overview of the process. For more details, you can consult this guide from ASIC.
As licensed and registered liquidators and administrators, the team at Insolvency Experts can help you understand the entire Australian liquidation and winding-up process for businesses.
If you are having financial trouble at your business and are exploring your options for insolvency, we’re here to help. Contact us now, and get the information you need to make the right decision for yourself, your business, and your employees!